Running the Numbers: December 2006/January 2007

The latest facts, figures and benchmarking data in RFID, Diversity Procurement, Global Supply Chain and Sourcing/Procurement


Global Supply Chain

Offshoring of Back-office Functions Could Yield Big Savings for Fortune 500; 1.47 Million Employees Could Feel Direct Impact

The Fortune 500 could potentially save $58 billion annually, or over $116 million on average per company, by offshoring many of their back-office activities, according to research from strategic advisory firm The Hackett Group.

Advances in technology, along with increasingly educated global work forces, enable the portability of business support activities across information technology (IT), finance, human resources (HR) and procurement to take advantage of labor arbitrage. Hackett estimated that the increased use of offshore resources may have a direct impact on as many as 1.47 million general and administrative (G&A) jobs, or nearly 3,000 at a typical Fortune 500 company.

Hackett said that its research shows the best companies are strategically improving performance in finance, IT, HR, procurement, working capital and other areas in ways that help them respond to the pressures of globalization.

However, many companies are relying on outdated sourcing analysis techniques that lead them to materially underestimate the benefit available through off-shoring back-office operations. With labor arbitrage savings nearing 60 percent, Hackett finds that executives must analyze their process optimization opportunities to capture the potential value of centralization. Many organizations fail to examine the characteristics of business processes, allowing activities that provide no competitive advantage to remain decentralized in industrialized countries at a higher cost. Distributed activities are generally not portable and therefore not included within the scope of a globalization initiative. The education base and skill sets available in India, China, the Philippines, Pakistan, Eastern Europe, Brazil and other emerging countries continue to expand, offering a new level of savings combined with improved quality and talent, significantly strengthening the business case for globalization.

Having said this, companies still must use a well-balanced assessment methodology that fully considers the business' strategy, culture, transactional characteristics and readiness for change, Hackett advised.

Sourcing/Procurement

Smarter Sourcing Needed to Counter Rising Air, Hotel and Car Rental Rates

Continuing demand for corporate travel without a commensurate lift in supply will push costs higher across the board in 2007, with airfares worldwide forecast to increase, albeit at a slower pace than in 2006, and hotel rates pegged to remain at heightened 2006 levels and surge in key business centers, according to the American Express Global Business Travel Forecast.

"Keeping executives on the road while holding budgets in check will be a challenge for organizations in 2007," said Mike Streit, vice president and global leader for American Express Business Travel, Advisory Services. "For instance, as compared to 2006, the Forecast indicates an average domestic North America trip inclusive of air fare, car rental and hotel stay will increase $46, or 4.5 percent, in 2007, and an average international trip with its airfare and hotel stay will increase $180, or 4.6 percent."

The Travel Forecast shows a 3-5 percent increase in global domestic economy fares, and a 3-7 percent rise in global international business-class fares. Moderate airfare increases are expected as airlines pare back fare hikes, corporations focus on smarter buying and traveler security remains an area of concern.

Meanwhile, skyrocketing demand for hotels across all regions will continue to give hoteliers more control over negotiations, with few downward pressures available to stabilize pricing.

"We anticipate that more organizations will ramp up their procurement focus, implement new technology tools at the point of booking, update and strengthen their travel policies and focus on traveler behavior to ensure that negotiated savings are fully realized," added Streit.

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